CashNews.co
In late 2023, IBM announced a shift in its retirement benefits package, effective Jan. 1, 2024. The established method was a 401(k) match — a 5% match and a 1% automatic contribution. With the change, IBM will establish retirement benefit accounts (RBAs) that function as a pension plan.
Check Out: $5 Million in Retirement Savings — Here’s How Much You Could Withdraw Per Year
Learn More: 9 Easy Ways To Build Wealth That Will Last Through Retirement
Here’s what you need to know about the upcoming change and how it could impact your planning.
You can also read more about five expenses one retiree wished they cut sooner from their retirement savings.
Earning passive income doesn’t need to be difficult. You can start this week.
What the Change Means
IBM’s retirement plan changes mean each eligible employee’s RBA will be credited monthly with an amount equal to 5% of their eligible pay with no employee contribution required. The plan pays a guaranteed 6% interest return through 2026, after which it will earn an equivalent to the 10-year U.S. Treasury rate (around 4.5%) with a yearly minimum of 3% through 2033.
From 2034 on, employees are entitled to the 10-year Treasury yield without the 3% floor. Here’s how this change could affect employees and their retirement benefits in general.
Discover More: 6 Ways To Lower Expenses in Retirement While Still Living a Luxury Lifestyle
Downside to Employees
Financial advisors reported that the new plan is less enticing to employees.
The absence of a 401(k) match disincentivizes them to save as much, and they no longer have the opportunity to use their 401(k) for a loan. Employees also can’t choose how their money is invested.
IBM’s new plan has a guaranteed rate of return, but at 6%, it’s lower than the average stock market return of 6.5% to 7%. This guaranteed rate only gets worse after 2033 when employees receive a one-time raise, but it’s taxable income, and they won’t be compensated for any lost matches in the future.
Finally, there’s the question of funding. The protections employees get from the Employee Retirement Income Security Act (ERISA), where 401(k) matches have to be funded by actual dollars, don’t apply to the RBA, which receives credit.
Because of this structure, more of the benefit goes to employees who weren’t contributing to their 401(k), as they receive the newly defined benefit and aren’t directly impacted by the potential lower returns.
For everyone else, financial experts recommended allocating the rest of their 401(k) assets for more equity exposure, where IBM’s RBA acts as fixed income, like a bond.
By effectively balancing fixed income and equities, employees can achieve a return of 6% to 7%.
Why the Change?
IBM’s justification for the change is that it helps employees save for retirement automatically, with a stable, predictable and flexible benefit that lends itself to a diverse portfolio.
Phillip Hulme, owner of Stars & Stripes Financial Advisors, believed this switch is for cash flow management. It allows IBM to improve its cash flow by only having to credit accounts. The change to crediting accounts rather than funding real money means the company is displacing risk onto the employee’s side.
Some experts, like Steve Azoury, founder of Azoury Financial, are concerned that if IBM finds success with this, other companies will attempt to follow suit — subjecting more employees to a potentially lower rate of return.
Not everyone shared that level of concern, though. Others believed IBM was in a unique position to make this change and that other companies lack the same capabilities to do so.
Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, said other companies would have to have a traditional defined benefit pension plan already in place, one that is overfunded and not union-affiliated.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: I’m a Financial Planning Expert: What IBM’s Retirement Plan Changes Could Mean for Your Future
#cashnews #UnitedStates #newsfinace #finance #FollowsCashnews